Mark Price Company uses the gross profit method to estimate inventory for monthl

Question

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.

(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.

(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost. (Round percentage of sales to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.)

Inventory, May 1 $ 169,100 Purchases (gross) 658,500 Freight-in 31,700 Sales revenue 1,025,000 Sales returns 77,300 Purchase discounts 13,060

Explanation / Answer

Answer:

(a) Computation of estimated inventory at May 31, assuming that the gross profit is 30% of Sales

Gross Profit = Sales x 30% = $947700 x 30% = $284,310

Cost of Goods Sold = Sales – Gross Profit = $947,700 - $284,310 = $663,390

Cost of Goods Sold = Opening Inventory + Purchases (net of discount) + Direct Expenses – Closing Inventory

$663,390 = $169,100 + $645,440 + $31,700 – Closing Inventory

Closing Inventory = $846,240 - $663,390 = $182,850

Inventory at May 31 = $182,850

(b) Computation of estimated inventory at May 31, assuming that the gross profit is 30% of Cost

Sales = Cost of Goods Sold + Gross Profit (30% of Cost of Goods Sold)

$947700 = Cost of Goods Sold + 0.30 Cost of Goods Sold

$947,700 = 1.3 Cost of Goods Sold

Cost of Goods Sold = $947,700 / 1.3 = $729,000

Hence,

Cost of Goods Sold = Opening Inventory + Purchases (net of discount) + Direct Expenses – Closing Inventory

$729,000 = $169,100 + $645,440 + $31,700 – Closing Inventory

Closing Inventory = $846,240 - $729,000 = $117,240

Inventory at May 31 = $117,240

Note 1: Value of Sales is considered net of return and Purchase amount also considered net of purchase discount

Note 2: Freight In is related to PUrchase of material and considered direct expenses in relation to purchase

Basic Data for Calculation A Net Sales (Sales Revenue - Sales Return) $947,700 B Net Purchases (Gross Purchase - Purchase Discount) $645,440 C Inventory May 1 $169,100 D Freight In $31,700

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